When you’re looking for residential property to develop, you spend a long time scouring local estate agents for that perfect property. I’m also guessing that some people will find old commercial properties that are just ripe for conversion and will be doing those hurried “back of the envelope” calculations to see if the figures work. In some cases, it’ll be for their main residence; in other cases those with an eye for a business opportunity might see a potential development where they can make a profit as a business venture. One way of making a profit is to understand how the VAT reliefs work for residential property and use the VAT reliefs to save money.
Estimate your costs and then double it!
The problem is, of course, that many people think they can make a profit but then find themselves up to the ears in debt with a half-finished property. I’ve never developed a property, so I can only sympathize with those of you how have found yourself in that situation. (Check out my ebook about VAT and property development here, which explains how to save money with some sensible advance VAT planning). But today I’m thinking about those situations when money isn’t the most important factor.
I remember asking a successful property developer how it was that he always seemed to make a profit. Part of it was understanding the property market, knowing when and what to buy and sell. But he also made one particularly interesting comment, which was that whenever he was tempted to buying, his “back of the envelope calculation” was only the first part of a longer financial planning process, which inevitably ended up with him calculating that his initial calculation was usually off by about 100%.
He’d lost money on a couple of properties in his early days, on those occasions where he didn’t have time to do the full financial planning and took a gamble. He didn’t want to pass up on potential opportunities because of lack of time, so subsequently adopted a very simple approach when he couldn’t do his full financial planning. He would do his “back of the envelope” calculation as accurately as possible in the time available. Then he took a red pen to the estimated expenditure figure and doubled it and he rarely lost money on such developments in the future.
When money isn’t the most important factor
That sounds like a very practical way of avoiding costly mistakes, particularly if the development is a business venture. But we can all get carried away when it comes to developing property for our own homes. We’ve all had those “lightbulb” moments when we’ve seen a property and fallen in love, only to find that it’s even better when we get inside! And we are determined that we’ll find whatever money we need to buy or convert or refurbish the property, we’re so determined to live in it!
Most of us are restricted to certain types of property and certain locations by our pockets and income. But many of us have sacrificed other things – new cars, holidays, taken second jobs, begged or borrowed additional funding – to get our hands on that extra £10,000 or £20,000, whatever the figure – to buy that dream home. I have and it was worth every additional penny! I understand the pull of the dream home and I’m sure I’d be more than willing to make those sacrifices again should the situation arise again.
If you’re in that situation and you need to save as much money as possible, that’s when you start looking for ways to save money and when you can save some money on your conversion/expenditure costs by taking advantage of the VAT reliefs.
Marie
April, 2014